How to get rid of private mortgage insurance (PMI)

If you put less than 20 percent down on your home with a conventional mortgage, you’re probably familiar with PMI, or private mortgage insurance. It’s a surcharge that adds to your monthly mortgage payment, but luckily, there are ways to get rid of it.

When does PMI go away?

The Homeowners Protection Act of 1998 requires that lenders remove private mortgage insurance when a borrower reaches a 78 percent loan-to-value (LTV) ratio. For example, if the purchase price of your home was $300,000, you would hit a 78 percent LTV ratio when the outstanding balance of your mortgage’s principal is $234,000.

Be mindful that your PMI is recalculated using your current loan balance. So, the amount you pay decreases as you pay down the loan until PMI is completely removed.

How to get rid of PMI

PMI can add hundreds of dollars to your monthly mortgage payment. If you’re tired of seeing premium payments eat into your monthly budget, there are six main ways to get rid of it.

1. Wait until you qualify for automatic or final termination of PMI.
2. Request PMI cancellation when your mortgage balance reaches 80 percent.
3. Pay down your mortgage earlier.
4. Refinance your mortgage.
5. Reappraise your home.
6. Expand or renovate your home to increase its value.

1. Wait until you qualify for automatic or final termination of PMI

This is the easiest option: Just wait it out until your lender has to do the work. A federal housing regulation informally called the “PMI Cancellation Act” — formally named the Homeowners Protection Act of 1998 — assists homeowners trying to get rid of their PMI. The act dictates that your mortgage lender or servicer must automatically terminate PMI when your LTV ratio drops to 78 percent — in other words, when your mortgage balance reaches 78 percent of your house’s purchase price.

Alternatively, the servicer must cancel the PMI at the halfway point of your loan’s amortization schedule. For example, if you have a 30-year mortgage, the midpoint would be after 15 years. If you have a 15-year loan, the halfway point is 7.5 years. The PMI payments must stop even if your mortgage balance hasn’t yet reached 78 percent of the home’s original value. This is known as final termination.

Who this affects: Removing PMI in this way works for folks with conventional mortgages who have paid according to their original payment schedules and have reached the milestones of 22 percent equity or the halfway point in time. In both cases, the loan must be current and the borrower in good standing: no delinquent, skipped or insufficient payments.

2. Request PMI cancellation when mortgage balance reaches 80 percent

Another way the PMI Cancellation Act benefits you is by granting you the right to remove PMI once you have reached 20 percent equity in your home; that is, once your loan balance reaches 80 percent of the home’s original value. So, you get a 2 percent jump here, which can save you plenty of extra cash. For example, 20 percent equity in a $300,000 home means you can submit a cancellation request when your outstanding balance is $240,000 — $6,000 less than the 78 percent equity threshold.

Who this affects: If you’re making payments as scheduled, you can find the date that you’ll get to 80 percent on your PMI disclosure form (or you can request it from your servicer). However, you need to be proactive.

You must do the following to cancel PMI:

• Make the PMI cancellation request to your lender or servicer in writing.
• Be current on your mortgage payments, with a good payment history.
• Meet other lender requirements, such as having no other liens on the home (i.e., a second mortgage).
• If required, you might need to get a home appraisal. If your home’s value has declined, that would mean you have yet to reach that 20 percent equity and might not be able to cancel PMI.

3. Pay down your mortgage earlier

If you have the cash to spare, put it toward bigger or extra mortgage payments to help you hit 20 percent equity faster.

You can prepay the principal on your loan, reducing the balance — which also helps you save on interest payments. Even $50 a month can mean a dramatic drop in your loan balance and total interest paid over the loan’s term.

To estimate the amount your mortgage balance needs to reach to be eligible for PMI cancellation, multiply your original home purchase price by 0.80.

Who this affects: Homeowners who are sitting on a lot of extra cash can use this method to achieve 20 percent equity sooner. You can do so by making bigger mortgage payments, making more frequent payments or by paying a lump sum toward the loan. Check what methods your lender prefers.

4. Refinance your mortgage

When mortgage rates are low, homeowners might consider refinancing for lower monthly payments and reduced interest costs. While the recent sharp climb in interest rates means it might not now be worth the effort and expense of refinancing just to cancel PMI, it’s still something to keep in mind if you are close to the 20 percent equity mark.

It may be much smarter to simply pay for a new home appraisal. You can also refinance into a loan that doesn’t require PMI. One way to do this is by “piggybacking” — that is, taking out a home equity loan, line of credit or other mortgage, in addition to the new primary one. This additional loan finances your down payment, getting it to the 20 percent mark. Or you can refinance with a government-backed USDA or VA loan without PMI, but keep in mind that other fees and eligibility criteria apply.

With any form of refinancing, you’ll want to weigh the closing costs of the transaction and the new interest rate against your potential savings from the new loan terms — especially considering the higher cost of borrowing today — and eliminating PMI.

Who this affects: This strategy is not the best for very many people right now. Data from Redfin shows that more than 90 percent of homeowners with a mortgage have a rate less than 6 percent, meaning that they have locked in a better deal than they will likely be able to find in today’s high-rate environment.

5. Reappraise your home

In a hot real estate market, your home equity could reach 20 percent ahead of the loan payment schedule simply due to price appreciation. In this case, it might be worth paying for a new appraisal. If you’ve owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI cancellation. If you’ve owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.

Appraisals for a single-family home have risen in recent years. The average cost is between $300 and $800 (or more), depending on your area, according to the National Association of Realtors. Some lenders might be willing to accept a broker price opinion instead, which can be a substantially cheaper option than a professional appraisal. On the flip side, professional appraisals are highly regulated and provide an unbiased assessment. Either way, paying a few hundred bucks now can save you many multiples of that over the course of expected PMI payments.

Who this affects: Median home values have shot up by around 30 percent nationwide over the past couple of years, and borrowers who live in areas that are particularly red-hot might have seen their home values jump even higher. In fact, the value might have increased enough to bump you out of the PMI range. If this is the case, talk with your lender about getting a new appraisal and potentially canceling your PMI requirement.

6. Expand or renovate your home to increase its value

While it wouldn’t make financial sense to add onto your home just to get out of paying PMI, investments you make in your home can be a path toward ditching it. If you’ve added amenities or modernized, that might have increased the value, which could also mean more equity. Improvements like a renovated kitchen, new garage doors or windows or an extra bathroom, can increase your home’s value (as reflected in a new appraisal) and help you get to 20 percent equity.

Who this affects: If you are close to having 20 percent equity and being eligible for PMI cancellation, making significant improvements to your home could raise its value enough to meet that threshold if you pay to have your home reappraised after the work is completed.

Don’t drain your bank accounts to remove PMI

When it comes to how to get rid of PMI, you don’t need to be overzealous. While paying PMI each month — or as a lump sum each year — is no financial joyride, be careful not to make your finances worse by hustling to remove it.

“As long as you’re not taking an FHA loan, you’re not married to the PMI,” says McBride. “You can drop it once you achieve a 20 percent equity cushion, which may only be a few years away depending on home price appreciation. But do not feel the need to use every last nickel of cash to make a down payment that avoids PMI, only to leave yourself with little in the way of financial flexibility afterward.”

Most financial experts agree that maintaining some liquid assets, in case of emergencies, is a smart financial move. So before you tap your savings or retirement funds to reach that 20 percent equity mark, speak with a financial adviser to make sure it’s a good idea. In particular, if you bought or refinanced your home within the past few years, you probably have a favorable interest rate. Even with the added hassle of paying for PMI, pulling your money out of high-yielding or appreciating investments to pay off a low-cost mortgage might not make financial sense.

Your PMI rights under federal law

If you pay for PMI, you should know the rights conferred to you by the Homeowners Protection Act. In addition to providing the mortgage payoff benchmarks to get rid of PMI, the PMI Cancellation Act also protects you against excessive PMI charges. You have the right to get rid of PMI once you’ve built up the required amount of equity in your home.

Lenders have different rules for PMI insurance removal, but they are required by law to provide you with a mechanism to do so. Prior to the Homeowner Protection Act’s passage, a homeowner would have little recourse if their lender refused to release them from paying PMI, even if they had enough equity in their home that the lender would be made whole if the homeowner defaulted and the lender foreclosed and seized the home.

Before you sign a mortgage with PMI, ask for a clear explanation of the PMI rules and schedule. This will enable you to accurately track your progress toward ending the PMI payment. If you feel your lender is not following the rules for eliminating PMI, you can file a complaint with the Consumer Financial Protection Bureau.

Remember: You might be able to eliminate PMI when your home value rises or when you refinance the mortgage with at least 20 percent equity. But the onus is on you to request it.

FAQ about PMI

• How much does PMI cost?

  The average PMI payment ranges from $30 to $70 per month for every $100,000 you borrow, according to Freddie Mac. For example, if you get a $400,000 mortgage, you can expect to pay between $120 and $280 per month. Annual PMI premiums range from .46% to 1.5% of your mortgage, depending on your credit score, according to the Urban Institute.
  

• What are the benefits of having PMI?

  The main benefit of having PMI is that it lets you make a smaller down payment on a home. In a pricey housing market, that means you can buy a home sooner than if you decided to wait until you could afford a 20 percent down payment.
  

• Can PMI be removed if your home value increases?

  Yes. If your home value increases — either by housing market trends or by you investing to upgrade the property — you may be eligible to request a PMI cancellation. You’ll likely need to pay for a home appraisal to verify the new market value, but that cost can be well worth it to avoid more PMI payments.